# EUR-Lex - 52013DC0531 - EN

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# 52013DC0531

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Beyond 2015: towards a comprehensive and integrated approach to financing poverty eradication and sustainable development /* COM/2013/0531 final */**

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COMMUNICATION FROM THE COMMISSION TO
THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

Beyond 2015: towards a comprehensive and
integrated approach to financing poverty eradication and sustainable
development

Introduction

In the next two years, all partners should
prioritise decisive action to accelerate progress towards the Millennium Development
Goals. To that end, as we approach the UN special event on MDGs in September
2013, the EU and its Member States need to step up their efforts to meet current
commitments, including increased and more effective financing to support
developing countries, as outlined in the Commission Communication “An Agenda
for Change”[1].
The actions of the EU and its Member States (hereafter referred to as “the EU”)
are analysed in the annexed 2013 EU Accountability Report.

In parallel, the global conversation on the
wider agenda beyond 2015 has started through various processes. The Commission Communication
"A Decent life for all: Ending poverty and giving the world a sustainable
future"[2],
endorsed by the Council[3],
focussed on the “what”, outlining a vision for post 2015 that addresses poverty
reduction and sustainable development in an overarching framework. The Communication
on the 2015 International Climate Change Agreement[4] raises a number of important
issues related to climate finance beyond 2020. Following the Communication “Improving
EU support to developing countries in mobilising Financing for Development”[5] and the subsequent
Council Conclusions[6],
both include taking a comprehensive approach to all financing sources and an
integrated approach to the various processes addressing the same sources.

The present Communication focuses on the
financing part of the “how” of the post 2015 framework. It sets out to develop a
common EU approach to financing issues in the international discussions – how a
global approach could be structured, what resources are available and could be
mobilised, which processes can lead there and what principles should guide the
work. At this stage, the EU should remain open to dialogue with partners, and the
Communication does not propose new actions or commitments for the EU. These could
be taken later in the context of a global agreement on a spectrum of
commitments that reflects the changing needs and capabilities of various
international partners beyond 2015.

The Communication emphasises financing for
developing countries, but the proposed approach can be considered universally
applicable. The central tenet holds for all countries – the range of financing
sources is the same for all policy goals and needs to be used in a way that
brings best results.

1.           A
changing global landscape for finance

Over the last decade the world has
undergone considerable changes, especially in the distribution of global wealth,
countries’ ability to influence global trends and in the increasing role of
emerging donors, changing the understanding of development finance.

Several international processes consider financing
issues. The report of the UN High Level Panel on post 2015 and the UN Open
Working Group on Sustainable Development Goals include elements on financing
and other means of implementation; the UN committee to come up with options for
a sustainable development financing strategy is starting work and the UN
General Assembly is holding consultations to possibly strengthen the Financing
for Development process. In addition, the UN Framework Convention on Climate Change
works on the mobilisation and effective use of climate finance for post 2020 and
the Convention on Biological Diversity is operationalising its resource
mobilisation strategy. These and other processes consider the same resources
for achieving a range of policy goals, which may lead to overlapping commitments.
Instead, investments towards such goals, based on existing and future
commitments, should work seamlessly together and create synergies, both at
national and international level. Therefore various processes covering
financing should be coherent with the commonly agreed set of principles and be
integrated with each other so as to maximize their utility for achieving
multiple global policy objectives.

Current discussions present an opportunity
to revamp the Monterrey Consensus to create an approach to financing which matters
where most resources are used – at the national level. The 2002 Monterrey Consensus
and the 2008 Doha Declaration on Financing for Development put on paper a common
sense principle that still holds: the key to progress lies in the national
action of each country, putting all available resources to good use. This
comprehensive approach to financing should be at the centre of financing
discussions and further operationalised.

Resources can come from two sources: public
and private, both at the domestic and international level. Public domestic
finance includes taxes and other government revenues, including from natural
resources. Public international finance can take the form of grants, equity or loans.
Private domestic finance includes investments by local enterprises and
charities. Private international finance comprises international investments, private
transfers such as remittances and donations. New and innovative sources like a
Financial Transaction Tax, receipts from carbon trading or bunker fuel taxes
would also fall into one of the above categories.

These are the categories of resources that each
country can invest in all national and internationally agreed goals, albeit
using different instruments for different primary purposes. They should form
the basis of a financing approach. Public resources are directly at hand and
can be put to use by governments. Private finance is fundamentally different in
that it follows private interests and needs to be harnessed to support policy
goals. Public policy makers should seek to increase the financing available and
ensure that resources are effectively targeted towards the agreed goals. To
this end, all the sources should be seen together as a mix of means available
for delivering results.

2.           Where's
the money? Focussing where it matters from a developing country perspective

In developing countries, an estimated EUR 7,129
billion[7]
of public and private finance was available in 2010, with a potential to
contribute to poverty eradication and sustainable development.

Table 1: Finance available to developing
countries (billion EUR, 2010)

Public Domestic
Finance

Total: 3, 317

Tax revenue: 3,252

Potential of removing harmful fossil fuel
subsidies: 309

Public External Borrowing: 65

Memo items

Total Reserves, incl. gold: 4,074

Illicit financial outflows: 649 (estimated 120 lost in tax revenues) including from
corruption, criminal activities, and tax evasion & avoidance.

Public
International Finance

Total spent: 158

Official Development Assistance (ODA) Grants: 92, of which EU 39

Concessional Loans: 7, of which EU 3

Other official development finance: 54, of which EU -4

UN-sanctioned international security
operations: 5 of which EU 2

Private Finance
– domestic and international

Total: 3,652

Domestic Private Investment: 2,678

International Investments: 624

Foreign
Direct Investment: 443

Foreign
Portfolio investment 181

Private External Borrowing: 70

Remittances: 238

Potential from reducing the transfer costs to
5%: 12 per year.

Private Philanthropy: 42

The data confirm that domestic public
resources exceed international public finance (by a factor of 20), itself only 2%
of the total finance available in developing countries. Private finance is on
par with public finance. At the same time, there are fundamental differences
between countries in the composition of financing sources, as shown by the
different situations of the Low Income Countries (LICs) and Middle Income
Countries (MICs).

Figure 1

Figure 2

2.1.        Domestic
public finance – the biggest and best source for governments

Domestic public finance (EUR 3,317bn) is
the main source of financing directly available to governments for spending on policy
goals and is thus the most important element in a financing approach. Beyond
providing the fiscal space for spending on priorities, it should also
strengthen domestic accountability and contribute to a sound government-citizen
relationship. Most countries could significantly increase their domestic
spending on priorities, including by increased tax revenues, fighting illicit
flows and removing harmful fossil fuel subsidies.

2.1.1.     Domestic
resource mobilisation

The tax take of developing countries varies,
accounting on average for 13% of GDP in LICs and 22% of GDP in MICs. UNDP has
suggested that an MDG-consistent government revenue share may be over 20% of
GDP, showing that most MICs should be able to reach these goals solely using
domestic public resources. Furthermore, according to the IMF, raising
government revenues by about 3% of GDP would be feasible relatively quickly, even
without considering the potential of increased natural resource revenues and new
green taxes. This shows that ending dependency on aid is, in a longer-term
perspective, also possible in LICs.

Estimated at €649bn, illicit flows like
proceeds of crime, tax evasion and corruption, are an important drain on public
finances for many countries. Loss of tax revenue is only one part of the
negative impact of such flows, as they also discourage legitimate investments
and undermine the wider social contract. Countries should curb illicit flows by
regulatory and enforcement measures.

2.1.2.     Sustainable
borrowing and lending

Borrowing allows countries to frontload
investments and maintain stable public expenditure in face of revenue volatility.
The overall indebtedness of developing countries has come down over the years, but
many are still at risk or lack access to financial markets and rely on official
lending. Private lenders and non-Paris Club official lenders have become more
prominent creditors to developing countries. This underlines the need for all
actors to apply responsible lending and borrowing principles to ensure debt
sustainability.

Most of the EUR 4,074bn of developing
countries’ international reserves are held by a few MICs, while the buffers of
poorer countries are generally low. Precautionary reserves are a part of a
country's defence against shocks and could be complemented by insurance-based
instruments, while a sound macroeconomic and prudential policy framework is key
in limiting vulnerabilities.

2.1.3.     Spending
the available domestic public finance well

Using the available money right is at least
as important as increasing the resources. Countries should follow good public
finance management rules and ensure maximum value-added of available money. Investments
that matter most for reaching set goals should be prioritised and spending on one
policy goal should also support progress on other goals.

2.1.4.     Key
actions to increase the domestic resources invested towards globally agreed policy
goals

Each country should at national level:

– 
Reform tax systems, strengthen tax
administrations and implement legislation that reduces corruption. This
includes increasing transparency, accountability and sustainability in the
management of natural resources and tackling tax evasion and avoidance.

– 
Implement policies that ensure the money is well
spent, including innovative partnerships, leveraging private funds and
eliminating harmful fossil fuel subsidies.

– 
Follow responsible sovereign borrowing and
lending principles and build resilience.

To support national efforts all countries
and international actors together should:

– 
Require transparency of the financial sector and
multinational enterprises in key sectors, including the Extractive Industries
Transparency Initiative and other initiatives supporting the sustainable use of
natural resources, through rules on illicit flows, country-by-country
reporting, increased fiscal transparency and exchange of information. The EU is
leading the global action on these issues, but progress depends also on other actors
signing up to these principles.

– 
Implement anti-corruption rules like the UN
Convention against Corruption.

– 
Strengthen the international financial
architecture for debt sustainability and absorbing shocks.

2.2.        International
public finance – still important for some

ODA remains a major source of finance for
the 36 LICs which are also more affected by global challenges; it accounts for
12% of their GDP, already below LICs’ domestic revenues. At the same time public
international finance (158bn) is of marginal importance for developing
countries as a whole (0.7% of GDP). In the 108 MICs, ODA represents on average only
0.2% of GDP, confirming that aid should be focussed on the countries that need
it most.

2.2.1.     Increasing
finance and monitoring what matters

External public finance for developing
countries is a result of domestic budgetary decisions of each donor. The EU
collectively provides more aid than all other developed countries combined, has
fulfilled its Aid for Trade commitments since 2008, has delivered on the Fast Start
Climate Finance commitments and is increasing biodiversity finance in line with
the Nagoya and Hyderabad decisions. While the EU collective ODA slightly decreased
in 2012, the EU Heads of State and Government reconfirmed their commitment to reach
0.7% of GNI by 2015 despite the difficult economic situation. Emerging
economies and countries that have reached upper MIC status should provide their
fair share of international public finance, in line with the financial
resources they command.

The ODA concept is increasingly criticised
for being too broad or for neither covering all development cooperation providers
nor all relevant actions. Reforming ODA and better monitoring of the funding
for different policy objectives are needed, including improved policy indicators
(e.g. Rio-markers) showing the ODA volumes that support specific policy
objectives. A solid basis for capturing all finance that benefits developing
countries should be elaborated, so that all actors could be held to account
using the same measuring stick. The DAC work on reforming ODA is an important
contribution to this end. Monitoring of international finance should be part of
a comprehensive monitoring mechanism that also covers domestic and private
finance.

2.2.2.     Spending
the available external finance well

As with domestic resources, using the money
well means both doing the right things and doing things right: money
should be focussed where it is most needed, and used in innovative and
effective ways to ensure that it serves several policy goals simultaneously,
e.g. by mainstreaming specific policy objectives.

Innovative modalities of delivering finance
can increase effectiveness and should be scaled up. Blending of grants with
loans and equity, as well as guarantee and risk-sharing mechanisms can catalyse
private and public investments, and the EU is actively pursuing this. More
widely, as developed by the Leading Group on Innovative Financing for
Development, innovative financing can have significant revenue generation
potential and ensure more stable and predictable financing. Some innovative financing
mechanisms like the Clean Development Mechanism are designed to focus on
delivering on a specific policy goal, but such investments should also take
into account the broader context and contribute to other goals.

For doing things right, the
international community has taken clear commitments through the Busan Partnership
for Effective Development Cooperation to make actions more effective, based on
democratic ownership by developing countries and a shared understanding of the
need to provide global public goods. This can be undermined by multilateral
processes that seek to earmark funding for specific policy areas while developing
countries need to direct it to where it can do the right things to
achieve national targets related to global goals.

2.2.3.     Key
actions to increase international public resources invested in global goals

Each country should take ownership and
demand that all external finance follows their national development plans which
integrate agreed goals, in line with the Busan principles.

All countries and international actors should
agree to:

– 
Follow the principles and commitments of the Busan
Partnership in providing international public finance.

– 
Contribute their fair share to the global effort
based on a dynamic spectrum of commitments. The richest countries should
contribute more than upper MICs and emerging economies, while the external
support should focus on LICs. Cooperation with MICs, to benefit in particular
lower MICs, should be focused on key catalytic actions.

– 
Reform ODA and monitor external public finance
in the context of a comprehensive mutual accountability mechanism.

– 
Use financing modalities that fit country needs,
respecting long-term financial sustainability. Innovative mechanisms that
leverage additional resources should be scaled up, as well as stronger capacity
development and technical assistance.

2.3.        Private
finance –key driver of growth

Private finance is fundamentally different
from public finance. It follows private interests and does not per se pursue
public policy goals. At the same time, private investments (EUR 3,652bn) are the
key drivers of growth and can contribute to such goals. Even a small shift in
private investment priorities and modalities could bring about significant benefits
to public policy goals. Such shift can be achieved primarily through domestic
and international policy incentives, e.g. public-private partnerships.

The domestic and international private
sectors are well integrated, react to the same incentives and are therefore considered
together. Separation is only relevant for monitoring commitments.

2.3.1.     Investment
and trade; science, technology and innovation

Domestic investment dwarfs foreign
investment and is the mainstay of economic development. Foreign direct investment,
and to a lesser extent private external borrowing, complement this, also by bringing
in know-how and technology. Investments with positive impact on public goals
should be supported by a conducive policy environment and innovative mechanisms
such as performance-based payments for ecosystem services, carbon credits or biodiversity
offsets.

Trade is a major means to increase activity
and productivity. To reap these benefits, countries should create an enabling environment
that facilitates trade at international, regional and national level. Richer
countries should provide preferential access and support to the poorest. The EU
already provides generous access to EU markets, including full tariff and quota
free access for LDCs. Most developing country trade is already with other developing
countries, and the potential of South-South trade liberalisation should be
realised. At international level, the ability of LDCs to benefit from trade requires
specific attention.

New technologies should be harnessed
towards global goals through greater global integration. The feedback loop
between technology adapted to developing country contexts and innovation can be
further supported by encouraging greater investment in research, including
through innovative mechanisms like advance market commitments.

2.3.2.     Remittances

Remittances are a significant private flow and
account for a large share of GDP in several developing countries. A reduction
in the cost of transferring remittances to 5% in line with the G20 pledge[8] would bring significant benefits,
including in the case of the more expensive South-South transfers. Both sending
and receiving countries should adopt policies that create competitive and transparent market conditions, provide access to better financial services and encourage a more
informed and productive use of remittances.

2.3.3.     Private
philanthropy

Private philanthropy shares many attributes
of official assistance. It has been estimated at EUR 42bn in 2010 and may make an
important contribution in specific communities and on specific issues. Due to
its nature, private giving cannot mostly be taken into account in national
development plans, yet its transparency, predictability and effectiveness should
be increased.

2.3.4.     Key
actions to increase private resources invested in policy priorities

Each country should at national level:

– 
Create a business climate that supports policy
goals in line with international commitments on decent work, fosters innovation
and the development of domestic financial systems.

– 
Use public resources to invest in areas that leverage
private investments towards policy priorities.

In addition, all countries and
international actors together should agree to:

– 
Create an international policy environment of transparent
and equitable rules, including on trade and financial markets.

– 
Use public finance to leverage private
investments and support innovation, including through technologies.

Also, the private sector should agree to:

– 
Follow the principles of good corporate social
and environmental responsibility, thereby contributing to moving to an
inclusive green economy, including assessing the impact of investments on
policy goals, following the arm's length principle in transfer pricing,
providing transparency on their activities, and adhering to international CSR
and investor guidelines.

– 
Private philanthropy to apply the Busan principles
in providing assistance.

3.           Towards
a comprehensive and integrated approach to financing

3.1.        Principles

A global agenda with shared goals for post
2015 should motivate all actors to put their resources to good use. It should
be complemented by a solid approach to financing that is universal in
application, reflects the global developments and considers all resources at
the disposal of different actors. Revamping and broadening the international
Financing for Development agenda to fit tomorrow’s world would serve this
purpose best. While the process towards elaborating global goals has only
started, key principles should guide the financing discussions:

– 
Financing should be seen in the context of
policies. Good policies are the central pillar of implementation, because changing
policies is more effective than spending money for compensating bad policies.

– 
All available resources should be considered
comprehensively together, as they are parts of the same total. The three
categories of financing – public domestic, public international and private – provide
a structure to identify key actions at national and international level.

– 
A global approach to financing should leave
resource prioritisation first and foremost to the country level. This is where
decisions on the appropriate trade-offs between policy goals can be made most
effectively, within a framework of internationally agreed commitments, goals
and targets. The country level should be the focus for assessing the mix of
policies, financing and instruments needed for reaching agreed goals, as this
is where implementation takes place. All countries should commit to make best
use of the resources available towards agreed policy goals.

– 
The same way as different policy goals need to
be mutually reinforcing, the means for reaching these goals should work at
country level as one package of linked sources and instruments, allowing to
reach several policy objectives with the same money. Finance needs to support
synergies between various universal goals. While respecting existing
commitments, the principle should be mainstreaming of goals into national
policies rather than setting aside finance at global level for a specific purpose,
which creates fragmentation.

– 
External public finance should be rebalanced
towards the countries most in need, while emerging economies and countries that
have reached upper MIC status should contribute their fair share to that
purpose.

– 
All finance should be monitored together in a
harmonised manner to ensure transparency and mutual accountability both at
national and global level, aiming to make its use towards multiple global and
national sustainable development goals more effective. Tracking of all
financial flows should be improved, including their contribution to national
and global goals and related finance targets, where such targets exist. National-level
data availability and quality will be crucial for this, and statistical
capabilities should be strengthened.

3.2.        An overarching setting for
international processes

Building on the Doha Declaration promise to
take concerted global action on different challenges, the international
financing discussions should be linked within an overarching setting. Therefore,
the UN expert committee mandated by the Rio+20 conference to propose options
for a sustainable development financing strategy should be fully coherent with
the financing for development process. Merging these strands, an international conference
should be organised to develop a comprehensive and integrated approach to
financing, building on the outcome of the Expert Committee and the processes
preparing a post 2015 framework. As also suggested in the report by the UN High
Level Panel on post 2015, this strengthened global process should set the
overarching approach to financing, in particular for the post 2015 agenda. The
principles set out above should also ensure coherence and coordination of specific
financing streams and on-going negotiation processes (e.g. in the context of
the 2015 Agreement on climate change). This will ensure that each country can
target resources where they contribute best towards agreed common goals.

3.3.        Next
steps for the EU

This Communication aims at an EU common approach
to the financing discussions in the post 2015 agenda, the Open Working Group on
SDGs, the UN expert committee for proposing options for a sustainable
development financing strategy and the review of the financing for development
process. In addition, it should also frame the common EU positions on financing
in the climate, biodiversity, chemicals and other international processes.

The approach outlined above is a
contribution to the international discussions and the EU should use this for
outreach to engage in discussions with partners.

[1]               COM(2011) 637

[2]               COM(2013) 92

[3]               11559/13

[4]               COM(2013) 167

[5]               COM(2012) 366

[6]               14533/12

[7]               All sources of the figures in this Communication are
listed in the accompanying Staff Working Document.

[8]           5 December 2011 G20 Summit
declaration point 77